The Glasgow United Nations Climate Change Conference has been advertised as an effort to focus on sustainable environmental solutions. What got much less attention, if any, is that it is probably at least as much about having a sustainable financial system. Many noted that China, did not send its leader: Xi Jinping, president of the world’s greatest CO2 emitter. There was also another significant absence: the financiers who are hoping to profit from the trillions allocated into climate change projects.
To understand the perceived importance of the climate change agenda it is necessary to start with what sustains modern economies: growth. Growth is the rate at which transactions occur. That rate has to keep rising for the system to keep going. In a capitalist system capital has a cost: a necessary return. R. Taggart Murphy’s classic book on Japan’s economic collapse, The Real Price of Japanese Money, superbly describes what happens when that return on capital is not met.
For a long time, achieving economic growth was easy enough. In the period after World War II, it came from a mix of population rises — the so called ‘baby boom’ — and technological advances, especially in manufacturing: the introduction of items such as fridges, cars, televisions.
But those population increases slowed — fertility rates in most developed economies have fallen below replacement rates — and the technological advances intensified. There were spectacular efficiencies occasioned by advances in computerisation. Globalisation also drove down wages and prices in developed economies.
The production efficiencies raised the standard of living but, counter-intuitively, they were bad for ‘growth’. A fridge bought in the 1960s was expensive relative to incomes, so when they were sold growth increased because bigger transactions were involved. Fridges now cost very little compared with average incomes so the sales contribute much less to ‘growth’; the transactions are, in comparative terms, smaller. That pattern has been repeated across most industry sectors leading to global oversupply, lower costs and weaker economic growth.
The solution for the last two decades has been financialisation, whereby financial institutions generate money out of money. This kept the rate of transactions, or ‘growth’, intact. But it was largely achieved using debt, and it has run its course. The only way to stop a debt crisis has been to have interest rates at near zero and introduce Quantitative Easing, whereby the central bank effectively uses its reserve powers to print money.
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